Nigeria’s foremost research house and rating institution, Agusto & Co. Ltd. recently published the 2020 Banking Industry Report. According to the report, commercial banks in Nigeria have collectively written off about N1.9 trillion worth of impaired loans between the 2015/2016 recession and now.
Agusto & Co. Ltd. known for the most current and comprehensive report in the banking industry in Nigeria stated that one of the major contributing factors to the loan write-offs was Nigeria’s weak macroeconomic climate. Also, the 2019 introduction of IFRS 9 accounting standards played a major part.
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“In the last four years, following the 2015/2016 recession, the Nigerian banking industry has written off a minimum of ₦1.9 trillion of impaired loans from its loan portfolio. This volume of write-offs has been driven by the weak macroeconomic climate and the introduction of the IFRS 9 accounting standard in 2019.” The report stated.
Furthermore, based on the report, as of 31 December 2019, approximately 23% of the industry’s gross loans and advances were classified in the stage two category, according to the International Financial Reporting Standard (IFRS).
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“As at the same date, four out of the 24 banks covered in the report had stage two loans to gross loans ratios above the 23% industry’s average,” the report stated.
Agusto & Co, however, believes that the volume of stage two loans is a threat to the industry’s asset quality and future profitability.
What This Implies
The economy has suffered a severe hit from the COVID-19 pandemic which has affected lots of sectors. Hence, the banks are significantly exposed to most of these sectors, including oil and gas, hospitality, and aviation. However, there is, therefore, the risk of more loans going bad.
This is another serious threat that could significantly affect banks’ asset quality in the long-run.
Meanwhile, the apex bank, Central Bank of Nigeria has given banks the permission to offer loan forbearance to some of their customers. According to the Agusto report, this would help moderate the expected asset quality deterioration, as well as ensure that loans can be restructured for customers in sectors of the economy that have been particularly hit hard by the pandemic.
Recall, that Godwin Emefiele, the Governor of the Central Bank of Nigeria, during last week’s MPC meeting, disclosed that about 22 commercial banks have so far restructured N7.8 trillion worth of loans (or 41%), out of a total of N19.9 trillion, for some 35,640 customers. Instead of allowing these loans to go bad, it will be better to restructure up to 65% of the loans.
It will please you to know that in a bid to ease the banks off the economical grunt of the Covid-19 pandemic. The Central Bank of Nigeria (CBN) granted palliatives to banks in the form of permitted loan restructurings to certain sectors that have been hit by the pandemic.
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What Is An Impaired Loan
Impaired loans are the probable outcome that the principal and interest payment won’t be collected. Loans are impaired when, based on current information and events, it is probable that an institution will be unable to collect all amounts due, according to the original contractual terms of the loan agreement.
Think of it like that friend you give money to and they claim they’ll pay you back. But their financial situation gets worse and you realize they probably won’t be able to pay you back.
However, a Non-performing loan is when the borrower isn’t making any payments, whether the principal or interest.
Think the friend you gave money to as “borrow” but as time goes on they never bother to give you any of that money back at all.
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